Ratings agency reaffirms negative outlook, despite JobKeeper change

Credit rating agency Fitch has maintained its negative outlook rating on Australian government debt despite the huge recalibration in the cost of JobKeeper and revisions to deficits from economists.

Last Friday, before Treasury's $60 billion reduction in the estimate of JobKeeper, Fitch revised Australia's credit outlook from stable to negative due to the COVID-19 hit to public finances and the economy.

On Monday, following the new JobKeeper numbers, Fitch director of sovereign ratings Jeremy Zook said he stuck by the negative outlook, saying a significant deterioration in the economy was still likely.

"Even after adjusting for the lower [JobKeeper] cost estimate, we still expect to see a considerable deterioration in public finances which will add to downward pressure on the sovereign rating and is reflected by our negative outlook," Mr Zook said.

"It also remains to be seen whether the lower cost estimates will result in fiscal savings, or will be reallocated elsewhere or held in reserve if needed to counter a larger than expected economic downturn during the remainder of the year."

Fitch said Treasury’s revision of the JobKeeper program estimates would reduce the government's deficit and gross government debt-to-GDP cumulatively by about 3 per cent of GDP over the next two years from Fitch's May 22 forecast which saw debt-to-GDP reaching 58.2 per cent in 2021.

At 58 per cent this stands well above the current Fitch forecast 'AAA' median of 44 per cent of GDP in 2021.

Economists expect the lower JobKeeper costs will mean the federal government is now likely to spend less on cash handouts to business than it first thought and collect more tax from companies and individuals, leading to substantially lower deficits.

Deloitte Access Economics' Chris Richardson has made a preliminary revision of $75 billion to deficit forecasts, suggesting it is not just the lower debt costs but also better-than-expected tax takes.

"The JobKeeper revision has two key areas that affect the budget," he said. "The first is that because fewer businesses will need JobKeeper the government will probably also make savings on emergency measures such as cash grants."

So far the federal government has spent about $8 billion on cash grants to businesses that were estimated could cost $30 billion.

"The second area is that business revenues and wages might not be as bad and that means higher than expected tax take," Mr Richardson said.

He originally forecast a $275 billion hit to the budget over two years – a $143 billion deficit estimate for this financial year and $132 billion for 2020-21.

"I would say this is now rather close to $200 million over the two years instead."

Mr Richardson assumes Treasury's estimates are based on data compiled before payroll data started to show a deterioration in incomes.

BIS Oxford Economics' Sarah Hunter has also lowered her forecast deficit and suggested that Treasury was still likely to have underestimated the improvement in tax collections.

"The re-estimate for the cost of JobKeeper means we now think the deficit will come in at around 5.5 per cent of GDP in fiscal 2020 – so about $106 billion," she said.

Goldman Sachs chief economist Andrew Boak pointed out that Treasury's update on JobKeeper did not change the number of estimated jobs that would be saved – "in other words, the workers that would’ve lost their jobs without the wage subsidy, which has previously been estimated to be around 1 million.

"On the one hand, assuming the number of jobs ‘effectively saved’ by JobKeeper is unchanged at about 1 million, the news has few implications for our forecast for the unemployment rate.

"On the other hand, if a lower number of total employees being covered also implies a lower number of jobs ‘saved’, it would imply more job losses than we had previously forecast."